Reserve Bank governor Michele Bullock says inflation will remain elevated

Reserve Bank governor Michele Bullock had admitted inflation was likely to remain elevated as a result of the Middle East conflict and domestic supply constraints.

She gave the dire warning shortly before the Australian Bureau of Statistics revealed inflation soared to 4.3 per cent in September, marking the highest level since March during the early weeks of the Iran war, as automotive fuel prices surged by 23.6 per cent.

The trimmed mean measure of underlying inflation remained high at 3.6 per cent with both measures of inflation above the Reserve Bank’s 2-3 per cent target for the 14th straight month.

“The increase in inflation reflects both consistent capacity pressures in the Australian economy and global cost pressures associated with the conflict in the Middle East,” Ms Bullock told a Senate estimates hearing on Wednesday morning.

“Because of both these factors, inflation is likely to remain elevated for some time.”

Asked by Liberal deputy Jane Hume about whether high government spending was contributing to high inflation, Ms Bullock said: “I’ve said this a number of times - part of the inflation problem is that demand is greater than the ability of the economy to supply.

“Demand is made up of demand from government and the private sector so I’ve said this a number of times, yes, to the extent that it is contributing to aggregate demand and aggregate demand is above supply, then it’s contributing to that.”

The Reserve Bank is releasing updated forecasts on Tuesday next week with the futures market already expecting a Melbourne Cup day hike that would take the cash rate to an 18-year high of 4.85 per cent, marking the fifth increase this year.

Non-tradable inflation, reflecting domestic price pressures, grew by 4.5 per cent while tradeable inflation, reflecting imported price pressures, soared to 4 per cent, up from 2.9 per cent in August, as Iran-backed attacks on Saudi oil pipelines pushed crude oil prices back above $US100 a barrel.

This occurred as average unleaded fuel prices climbed closer to $2.40 in the final week of September.

Goods inflation soared by 4.6 per cent compared with a 4.1 per cent increase for services inflation.

Australia’s consumer price index, which includes volatile items, was higher than what the big banks had forecast and Australia’s headline inflation rate was higher than other advanced economies in September including the US (3.7 per cent), UK (3.6 per cent), Canada (3.1 per cent) and New Zealand (3.7 per cent).

Treasurer Jim Chalmers told reporters in Canberra that Australia’s inflation challenge wasn’t unique but promised the consumer price index would still fall within the RBA’s 2-3 per cent target band by the end of 2027.

“The expectation is that we’ll see inflation back in the band towards the end of next calendar year but obviously Treasury and the Reserve Bank for that matter will update their forecasts in the usual way.

“The numbers in today’s data are still too high,” he said.

“Inflation has increased in every major advanced economy in September and that’s why the markets are expecting rate rises in all of them.

“Annual inflation has been increasing more in other countries than here, but we know this doesn’t make it any easier for Australian families and Australians more broadly who are under pressure.

“We already had an inflation challenge in our economy and the war in the Middle East is making it worse.

“Budgets aren’t the primary driver of prices in our economy but we can and continue to play a helpful role in the fight against inflation.”

More to come